Annuity or CD? That answer depends entirely on what you have planned for the money.  There are advantages and disadvantages to both methods of saving.  And of course there are hybrid CD Type Annuities that offer Higher Yield’s than CD’s, with the tax deferred advantages of an Annuity.

	A CD is better if you will need the money in a year or two.
	An Annuity may make more sense if you have a medium range investment horizon, of five years or more.
	An annuity is a safe investment but a CD will offer fewer restrictions if you will need all you principal back after the investment term.
	If you want to protect and grow your capital for a few years, then turn that capital into an income stream, a deferred annuity is the perfect choice.

If you have a longer term investment perspective, like 10 years or more, an annuity growing tax deferred will outpace a CD, even if you pay the taxes and withdraw all the money at the end of the term.

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Finally, if you intend to invest for the long term then convert the principal and interest into an income stream in retirement, you may find that a Deferred Annuity is exactly the right combination of growth and security you’re looking for.

So how to they compare side by side?

For this example, let’s assume you have a 7 year investment horizon. You don’t know what you’ll be doing with the money after 7 years, so you don’t want to get too locked in.

Banks will tell you that a CD is the best place to put money, citing safety and an FDIC Guarantee.

But let’s dig a little deeper- there are many more factors at play here. Don’t forget the Ground Rules – financial institutions want your money, want to keep it as long as possible, and want to pay very little for it.

Retirement Investors should seek safety, but also should balance this with the highest after tax yield possible. In this scenario, because you have a longer term horizon, you should seek out a Tax Deferred yield which will significantly outpace a comparable taxable yield. CD’s are not tax deferred; you pay taxes on your gain annually. Adjusted for inflation, your money rarely grows at all and in fact you are only Losing Money Safely .

Fixed Annuities offer tax deferral, a higher interest rate than a CD, and comparable safety when placed with a stable company. Let’s put these two vehicles on paper and see which one offers you more of what you are looking for.

Let’s look at your 7 year investment. We’ll assume the CD has an annual interest rate of 3.5%. This is much higher than the national average on jumbo CDs, but we’re looking at a long time line and giving the CD the benefit of the doubt.

We will also assume that the taxes due annually on the CD are paid from the investment. Finally, we assume a combined State and Federal tax bracket of 35%, but of course you may be higher or lower.

A reasonable amount of interest is earned in the CD over the seven-year period. As you can see, much of that return is wiped out due to the annual taxation of the investment.

How does the Annuity compare?

This table shows a substantially greater amount of interest due to the tax deferral available in annuity contracts. You did in fact pay more in taxes, but you had even more money available to pay those taxes.

Illustrated side by side, the benefits of the annuity are obvious.

It’s important to note a couple other key features of Annuities:

	With an Annuity, you don’t pay your taxes until the END of the deferral phase
	Often an investor’s tax bracket in retirement will be lower than during their earning years, further increasing the after tax account value and yield
	If you convert your account value into an income stream at the end of your tax deferral period (annuitization) you can continue to defer your taxes out into the future.

For an investor with a medium to long term time horizon and the goal of growing their assets and then converting those assets into a stream of income, the Annuity is the clear winner over CD’s and Treasuries.

For short term investors, or those seeking maximum liquidity, the CD has its place. However, most good annuities offer annual free withdrawals of 10% of your paid in principal, mitigating liquidity constraints.

When a CD yield and an Annuity Yield are the same, your decision needs to be based on your liquidity needs: the tax deferred growth of an Annuity will outpace the currently-taxed CD, but comes at the trade-off of some liquidity.

When you compare annuities in The Annuity Report , and you look at an annuity with a low guaranteed rated and low current and yield to surrender rate, you know that the liquidity restriction of this product isn’t a good deal. It’s products like these that tempt investors with front-end bonuses, and teaser rates and low guarantees in later years, with long surrender charges, that give annuities a bad name.

Our Suitability Quiz will help you determine if an annuity is a good fit for you. And please, Contact Us if you would like to speak to an Annuity Expert.

More about Annuity vs CD.

As a customer you give the bank your money and agree to leave it there, at the risk of a penalty, for a certain period of time, usually anywhere from three months to five years.  In return, you are paid an interest rate that is better than a savings account or money market rate.

The bank takes your money and loans it out to other people at an even higher interest rate and makes a profit on the difference.  The bank makes more money but they also deserve to profit.  They guarantee your money and take the risk that a potential borrower doesn’t pay it back.  The bank’s reward is justified for the risk they take and the guarantee they offer depositors.

So far, it looks like a fair deal.  In simple form, each party should be happy with the terms.

But look beyond that relationship for a moment to see what else is going on outside that relationship.  Your money is safe, no doubt, but are you really getting ahead?…..

Most people don’t realize that money is susceptible to many eroding factors.  Among these, taxes and inflation are two of those factors I would like to focus on.  As we have explored in other areas of this site, taxes can seriously affect investment returns.  In just the same fashion, inflation can be every bit as damaging.

Let’s look at this by way of an example.   We’ll buy a CD, hold it for a year and adjust the earnings for taxes and inflation and see how much we have left.  Let’s start with $100,000.

Assumptions:

4% CD interest rate

3% inflation

40% tax bracket

Wow!  That is not an optical illusion.  In this scenario, after one year in a CD where inflation is a realistic 3%, the power of your money has actually decreased.

Now, in other areas of the site, we talk about protecting your money from taxes.  The inescapable truth is that inflation can make any investment look a lot less desirable.  If you want safety, you must find a place for cash that moves ahead of the rate of inflation.  Taxes make that job even more difficult.

As popular and safe as bank CDs are, the Straight Talk is that you are doing nothing more than losing money safely .

If you look hard enough at the best search engines on the web or in the classified pages of newspapers, you will find investment offerings like tax liens and private real estate investment note offerings yielding 8% to 12% or sometimes more.

Please, send away for a prospectus.  The reading is revealing and interesting- generally you will see that you, the investor, retain ALL risk associated with the offerings.  The companies, many with no credit rating and no track record, simply promise to pay… with no guarantee, personal recourse, history, or track record to back it up!

So much for safety!

Go to the opposite extreme for true safety, and you are stuck with government notes.  As of this writing, they yield less than 0% due to market turmoil.  But even when prices are normalized, T-Bills are in the 2-3% range.  Investors worldwide are therefore willing to lose money over the short term and give it to the US government to use, rather than invest in any other instrument.  Likewise, certificates of deposits are low yield, and after the bank failures, these hardly seem like low risk.

So much for Yield!

High-yields go out the window for safety, and safety is illusory!

So, what to do….

Investors in a cash position should congratulate themselves for being prudent and safe. But you know your need to step out into the market again soon.  Many need to place cash in a high yield safe investment that avoids the volatility of the current markets. Is this an oxymoron?

How about an investment with the safety of a CD, but the yield of a mutual fund… Would this work?   If you think this is too good to be true, read on…..

A great high yield safe investment comes in the form of a fixed annuity from a highly rated insurance company.  Insurance companies take in premiums and make investments, but you enjoy one major advantage in an annuity over a bank CD- …..  Tax deferred appreciation on your investment.

Insurance contracts, such as fixed annuities, offer competitive rates and tax deferred appreciation of investment gains, yet give up very little to a risk premium associated with most other investments.    The biggest tradeoff is usually liquidity- access to your funds.

Financially strong insurance companies have very small leverage ratios in comparison to banks, so in addition to stringent state regulation, these companies suffer much lower default risk than banks.  Also, state insurance guaranty funds back deposits up to $100,000 in most states.

Returns on fixed annuity contracts can exceed 5.5% in many cases with companies that have superior financial strength.  Plus, when you calculate that annuities enable investors to defer taxes and have the interest compound over time, you realize these are powerful tools.

For a complete primer on annuities, be sure to read  The Annuity Report and refer to the Annuity vs. CD comparison section for more information.

Also remember, to reach comparable safety with government backed notes of any kind, it is essential that you place your business with only the best financial institutions.  We give all the tools to select only the best companies in The Annuity Report .